PART B PART B is worth 20 marks. Each question is worth 5 marks. QUESTION 1 (Cap

Question

PART B PART B is worth 20 marks. Each question is worth 5 marks. QUESTION 1 (Capital Budgeting) Two projects A and B are mutually exclusive and will be repeated indefinitely. Project A requires an initial investment of $10,000 in an asset with a life of 3 years and the project (of the same timeframe) has an NPV of $36,882.04. Project B requires an initial investment of $30,000 in an asset with a life of 5 years and the project (of the same timeframe) has an NPV of $51,206.70. The cost of capital for both projects is 10%. Which is the better project? Explain with illustrations.

Explanation / Answer

Net present value = PV of cash inflows - PV of cash outflows

When evaluating mutually exclusive proejcts, project with highest positive NPV should be accepted. Project with positive NPV will increase firm value.

Hence, Project B should be accepted.

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